Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.

You Wanted To Know How Many Traders Lose, Now You Know

We all know that Forex trading carries some risk, but there has never been any concrete data on just how risky it is. The most common figure thrown around in the internet is that 90% of Forex traders lose their money, but there were actually no numbers from the brokers. Of course, you wouldn’t expect a broker to announce how many of their clients lose money, especially if it’s a huge percentage. Recently, though, ESMA has made it possible to get accurate figures on the percentage of traders who lose money. Not only does this finally provide the much needed information about risk, but also about which brokers have the least percentage of losers among their client base.

Why are brokers required to reveal this information?

Starting in the beginning of August, ESMA implemented a number of new regulations to govern the Forex market. Among other changes, which we mentioned in a previous article, Forex companies that are regulated by ESMA were required to reveal the ratio of clients losing money to those that make money. When these rules were implemented, the chair of ESMA said that the intention was to increase trader awareness on the risks involved when trading the Forex market. In the past, a broker would simply advertise and point out how easy it can be to make money in the markets, but now traders would be aware that the truth isn’t so rosy. (Are you aware that: ESMA Finally Puts Its Foot Down On MiFID II Regulations)

The move by ESMA is not isolated since there have been steps in recent years to increase transparency in the Forex market globally. Although the market is still decentralized and overseen by different Forex regulators from all over the world, most of them have already agreed to the FX Global Code of Conduct. There are about 55 principles set out in this agreement, chief among them being transparency and client safety. (Choose from: The 3 Most Trusted Exchange Authorities in The World)

By asking brokers to reveal the ratio of winners to losers, ESMA was hoping to combat aggressive marketing strategies by brokers. In the past, a broker would only use advertisement banners on the internet to lure new clients by making false promises. Under the false belief that someone could make some quick cash, a new trader would make a deposit and try to give the industry a try. It was only after it was too late and the trader had already lost all their capital that the trader would realize they had been scammed. This was such a common occurrence that the process was even termed as ‘churn and burn’. Brokers would keep running these operations under the confidence they could always sign up new clients from whom they could get money either by directly scamming them or just gaining from the spreads. (Do you know: How Is Spread Betting Different From Forex Exchanging?)

However, now these churn and burn schemes will become a bit more difficult to operate because new traders would not make that deposit as willingly as they would have before. Imagine if someone made you a business proposal and told you it had an 80% chance of failure, you would not be quick to agree to the proposal knowing the risk. The Forex market is also just as risky, and ESMA is hoping new traders who might not be well-versed in the Forex industry will be more adamant about making that initial deposit. After all, the studies show that the traders who suffer the biggest losses are those who are new to the industry. (Should You Invest In CFDs Or Stocks To Make More Money?)

The requirement for brokers to reveal their win/loss ratio is part of a number of other changes in Forex regulations that came into effect in August this year. These new rules have been considered draconian by most, and they are indeed very strict and perhaps even harmful to the industry. That is why ESMA is giving the market participants 3 months to give the regulations a try after which the regulator will consider the impact of the regulations. Therefore, we should know the complete effect of these new laws by the end of October and see what the regulator is going to do moving forward. For now, we can only look at what the impact has been so far, and this can be seen from the most recent data collected by Finance Magnates. (How to choose a Forex agent: basic rules and useful tips)

What does the data show?

It has been less than a month since the new laws kicked in among EU-regulated Forex brokers, but the data is already coming in. Finance Magnates did a really good job of comparing the biggest brokers regulated by ESMA and ranked them in descending order starting from the one with the highest win/loss ratio. This information can be seen in the image below where you can see that AETOS leads the pack with 36.3% of their traders being profitable. At the bottom of the list at number 37 is Vestle (formerly known as iFOREX) who had 14% of their clients making money. (Here are the: 10 most common mistakes Forex participants make)

Clearly then, the number most often mentioned (95% of traders lose money) may have been unfounded. From the figure above, it seems the average percentage of losing clients hovers between 70% and 80% for an average of 76.3%. It is still not very good news to a trader just considering the Forex market, but it definitely is a bit more optimistic. In the end, the Forex market is a zero-sum game where someone has to lose money for another one to gain their share. Considering that most traders get into the markets without comprehensive understanding of the market dynamics, these numbers should not be surprising. (Short-term participants should know the: 10 rules of how to earn money with scalping)

Should you only work with the brokers at the top?

There may have been other factors, though, that may still lend credence to the 95%-loss figure. For one, these numbers represent brokers who are regulated in the EU by ESMA and under MiFID II. Generally speaking, Forex regulations in this area are very good and strongly enforced, which could mean that the brokers were pretty honest even before the new laws. As such, the numbers do now represent the entire Forex market with brokers regulated by less strict regulators. CySEC, for example, has over 200 brokers that they regulate. With so many brokers to supervise, you can be sure oversight isn’t as close as it should be. All of this is still not to mention that there are probably hundreds more brokers signing on clients without any license whatsoever. (Concepts Every Participant Should Understand: Leverage, Margin And Hedging)

Moreover, it can be argued that simply working with a broker at the top of the list does not automatically mean it’s your best option. The number of clients a broker has may also come to play. Take one broker whose win/loss ratio is pretty bad from the list with only 15% of their clients making money, yet they have millions of clients. Another one has a good win/loss ratio of, say, 25%, but with only a few hundred thousand clients for example. The numbers would show that the first broker with millions of traders has many more winning traders than the second, even though their win-loss ratio is not so good. That would mean you would be more likely to become profitable with the more popular broker regardless of their win/loss ratio. (Some of the: Differences between demo and real accounts)

This all means that there is much more to consider about a broker beyond their win/loss ratio as shown in the table above. Instead, the percentages should be used as another piece of criteria to consider about a broker when choosing a Forex broker. ESMA did not simply want traders to judge a broker by their win/loss ratio, but simply to increase transparency. The problem was that, in the past, some unscrupulous brokers with terrible win/loss ratios could attract clients just by making false promises. Now every trader is going to know whether what a broker claims is true or not. (Find out more about: MetaTrader 4 advanced features)

What else do these numbers show

Despite some of the shortcomings of this report, there is no doubt we can learn a lot about the market from the information. The most important is to see which brokers host the highest number of winners. Although we have already mentioned how such ratios could be unreliable in discerning the best broker, it was interesting to see how the biggest Forex brokers rank compared to each other. Some names you would not have expected at the bottom were those of Forex.com, Plus500, FXCM and some other notable brands. (This is: How to protect yourself from margin call)

These are some of the most renowned brands in the world, and it was very interesting to see them at the bottom of any list. Then again, like we mentioned, these numbers are not the only criteria that makes for the best broker. Perhaps you ought to consider other factors about a broker as these percentages do not fully answer the question, how to choose a Forex broker? The quality of service offered as well as other trading conditions also need to be factored in. Lucky for you, we have already discussed these in detail previously. (How to choose a Forex broker: basic rules and useful tips)

What was really interesting, at least for us, was to see how some brokers managed to increase the ratio of winners among their clients. One prevalent factor was social trading, which we have also discussed in the past. Among the top 5 from the list are eToro and Darwinex, both of who offer social trading services to their clients. In fact, social trading is a core factor for eToro who probably have the most advanced social trading platforms of any Forex broker worldwide. (Do you want to know: Who Are The Best Forex Social Trading Brokers To Work With?)

The benefits of social trading are obvious – you get help from a professional. In other statistics from research, it was revealed that the highest number of losing traders are amateurs who eventually quit within a month or a year. With social trading included, however, these amateur traders can avoid being part of the statistics by getting help from the professionals. Social trading works in different ways, but it basically involves copying your trades from someone else who has a proven track record of consistent success. Therefore, this is an added bonus to the brokers who can simply add the winning traders who just copied their trades from others to their win/loss ratio. (These are the: 10 steps of successful participants)

How will this law change the Forex markets in the future?

By now, you should already be rethinking your options if you had been in the process of selecting a Forex broker to work with, whether you’re a new trader or just looking at alternatives. This is exactly the goal that ESMA was trying to achieve – shed light on the actual goings on in the markets. It will also affect the brokers who now have to consider what their win/loss ratios mean for their companies. Let’s try to look at both sides of the coin:

What you gain from this data as a trader

The benefit to you as a trader from learning about this is simple – now you have more information with which to select a broker out of the many. Just imagine yourself searching for a good Forex broker and getting a glimpse of the image above of the brokers with the highest win/loss ratios, that would certainly help, wouldn’t it. Sure, it may not be the best criteria for selecting a broker, but it doesn’t hurt knowing either. (These are the various: Types of Forex exchanging accounts)

The significance of the data from win/loss ratios is supposed to tell you whether a broker can be trusted to increase your chances of success. Unscrupulous and scam brokers who run churn and burn schemes are those companies you should find at the bottom of the list. It is because such companies do not try to keep their clients, but rather depend on signing on new clients after the previous ones have lost their money. The best brokers, though, make sure that they maintain excellent services and do not do any activities that may harm their clients. For example, the most popular Forex ECN brokers transfer their clients’ trades to the interbank market without interfering or any conflict of interest. Such measures ensure a high number of their clients make money rather than losing it as they would with a market maker. (Can A Forex Agent Avoid Sending Trades Directly To The Interbank Arena?)

What about the broker?

For the brokers, being forced to reveal the percentage of their clients who lose money will depend on how their clients perform. For a broker with a high win/loss ratio, they will be very proud of their numbers and will not hesitate to splash the images all over the internet. On the other hand, those brokers with less than favourable percentages may feel undercut by ESMA. We have already discussed how reliance on win/loss rations is not the best criteria to judge a broker by, but it is a catchy headline that many traders will look at. This is very tricky for the brokers because there really is nothing they can do to help their traders not lose money. After all, it is the traders themselves who make bad choices, but that means the brokers need to rethink their entire business structure. (This is: How to select a PAMM account)

Given that the brokers know traders will consider their win/loss ratios, brokers may begin to filter the clients they sign on. Amateur, uninformed traders make up the highest segment of losing traders, and the brokers may start to turn down such clients in fear of damaging their win/loss ratio. They may not do this directly by denying applicants, but they may introduce stricter requirements. For example, by raising the minimum capital required. That way, they can ensure that those traders who sign up are confident of their skills and want to invest for the long haul, not just joining to make a quick buck. That would certainly weed out many traders in the latter category. (Keep an eye out for these: Main central bank meetings)

Think about it, as a broker, would you want to sign up a client with little capital whose only interest is giving the markets a try because they think it may be fun? Or would you prefer someone more serious in the markets as an investor knowing they would be more serious? Surely, the latter would raise your win/loss ratio, make your company look good and attract even more traders. Remember that most brokers earn their revenues by charging commissions and spreads on trades. (Expect some: Changes In Forex Regulation Through MiFID II)

Something else would definitely change for the brokers, and that is in how they attract new business. Flashy advertisements on the internet are clearly out now that any trader would be able to see through the false promises, so brokers have to find new ways of advertisement. In the Forex market, brokers earn the highest proportion of their revenues from the smallest proportion of clients – the 80/20 rule where 20% of clients bring in 80% of revenues. These successful clients are usually high net worth traders and institutional investors. Knowing that these are the most profitable market, brokers will focus their attention on them and their needs rather than those of the common individual trader. (Find out: Why Participants May Need To Use a VPS Service)

What might those needs be? You may be asking yourself. Well, just think about what you look for in a broker as an individual trader or as an institutional investor. The former is more interested in tight spreads, high leverage, etc. The latter, on the other hand, would prefer a wider selection of trading instruments, fast execution, etc. That means it is unlikely brokers would petition ESMA to repeal these laws, rather they will just shift their focus to a more lucrative market segment and keep running their business as usual. (Learn to use the: Ichimoku trading techniques for the FX arena)

What is most clear from our assessments and predictions about market changes from both the traders and brokers is that this is uncharted territory. No other regulator has ever imposed such rules and all eyes would be on ESMA to see how the markets are going to react to all of this. (Why you should: Think Twice When Making A Deposit In A FX Company)

Parting shot

As we mentioned at the beginning, it has been less than a month since the regulations were implemented, and that is not enough time to get the complete picture. Luckily, ESMA will continue to enforce these laws up until the end of October since they are in place for a 3-month limit. Afterwards, it is up to ESMA to keep on enforcing the laws or make changes to address any shortcomings of the law or even suggestions from brokers, clients and regulators. The supranational regulator has proven to be very understanding of the varying needs of all the participants, and it would be interesting to see what they decide to do at the end of November. (FX Rigging And Manipulation: How The Major Investors Pull It Off)

Until then, we all have no option but try to play by the current rules and, who knows, they might even prove to be actually beneficial, contrary to what most of us believe. The results so far have shown this as we observed in a previous post, and this may just be the yardstick the rest of regulators around the world use to carve out their own Forex regulations.

If you want to join the small percentage of winning traders, you have to manage your time properly. This guy explains it succintly:

Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.

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